Archive for the ‘Money Market Funds’ Category

Can you imagine entering a store, comparison shop, select your product, and then find out at the register that the price highlighted on the product is not the real price you pay. How would you feel? Probably find another store, right?

What if this pricing racket was going on within almost every store carrying these products? Think about calling The Better Business Bureau, perhaps? Well, what do you think happens when you buy a widely marketed product on Wall Street? What product? Mutual funds.

Do you really know just how much you are paying for your mutual funds? Really? (more…)

Sallie Krawcheck was formerly president of global wealth and investment management at Bank of America and has also held senior positions at Citigroup and Sanford C. Bernstein & Company. She clearly understands the game.

Krawcheck wrote an excellent piece in The Wall Street Journal yesterday on the risks embedded in money market funds. Her work was largely exemplary, BUT fell short of fully informing readers and investors of risks within these funds. (more…)

(This commentary is a little lengthy, but not overly so. I strongly encourage you to read and ponder the details embedded here as I firmly believe America’s core principles of decency and justice are on the line. Let’s stand up for America!!)

What would be the outcry in America if a foreign government or corporation knowingly and willingly abused the personal finances of multiple tens of thousands of our fellow citizens? Imagine if that entity were a large Chinese national bank or a Russian financial conglomerate? What if it were a division of an organization involved in illicit activities or even worse?

Do you think the United States government would intervene very aggressively on behalf of our fellow brethren? Might the media be up in arms with headline stories on a daily basis? Would the personal assaults precipitate an international trade embargo or a discontinuation of diplomatic relations? Does this sound like the stuff of a Harrison Ford virtuoso performance? Even better, this must be the plot to the next James Bond thriller, right? (more…)

Sense on Cents once again thanks our friends at 12th Street Capital for providing tremendously useful information and analysis. What do we learn today? The new rules adopted by the SEC for money market funds.

The overview of these rules is provided by Orrick, Herrington and Sutcliffe LLP. The driving force behind the new SEC rules is an effort to promote greater disclosure and liquidity within money market portfolios. After the crisis of 2008-whenever (it’s not over yet), money market funds were and are much riskier than previously perceived. The risks lay in the fact that these funds invested in a fair amount of risky assets. Now that the government backstop of this industry has ceased, the new rules are needed for the industry to move forward.

Investors need to know that when these rules are effective (sometime in 2010), funds can ‘break the buck’ ($1.00 NAV, net asset value) and suspend redemptions.

Navigate accordingly knowing that the money market industry is not what it used to be.

Thanks again to 12th Street and to Orrick for this 2-page overview. Click on image to open pdf document:

Our equity and bond markets reflect lessened risks and increased economic recovery, right? Well, investors in money market funds are taking on significantly greater risk today, whether they know it or not. How so? Today is the day that Uncle Sam is ending his federal backstop for money market funds. What does this mean? On a going forward basis, money market funds may very well ‘break the buck.’

Traditionally, the money market industry has prided itself on its ability to market these funds as being the effective equivalent of bank deposits. Bank deposits, however, are federally insured up to 250k. Money market funds were presumed to have such safe investments that they would always maintain a $1.00 NAV (net asset value). That ‘sales pitch’ worked for a long time until a year ago when Lehman failed. A number of funds holding short term debt issued by Lehman, as well as other questionable assets, were poised to ‘break the buck.’ Hank Paulson and Ben Bernanke realized they needed to step in to stem this flow of money so they implemented a federal backstop of these money market funds. That backstop ends . . . today!! As such, whether investors appreciate it or not, they now have significantly more risk in these funds.

This story is receiving very little focus in the midst of all else that is going on along our economic landscape. That said, it bears real attention. The Wall Street Journal provides a cursory overview today in writing, Treasury Winds Down Money-Fund Backstop:

Now that the panic that flowed through financial markets last year has eased, the U.S. Treasury Department is making way for an usual rescue program set up to protect money-market funds to expire Friday.

U.S. officials established the Guarantee Program for Money Market Funds one year ago, during the height of the financial crisis, in the wake of the failure of Lehman Brothers Holdings Inc.

But now that an economic recovery might be taking hold, the government is allowing the program to wind down.

“As the risk of catastrophic failure of the financial system has receded, the need for some of the emergency programs put in place during the most acute phase of the crisis has receded as well,” Treasury Secretary Timothy Geithner said in a statement.

Secretary Geithner may be premature because although markets have recovered, a number of sectors of our overall economy remain severely stressed. The investment assets correlated with these sectors are no longer deemed as safe as once thought.

While the panic on Wall Street has obviously passed, investors in money market funds should not blindly accept that these funds will maintain a $1.00 NAV going forward. The fact is, many of these funds do have investments in a variety of short term instruments that have declined in value.

While the SEC has recently implemented rules in an attempt to insure that money funds will have sufficient liquidity for investors, those rules do not guarantee that funds can’t or won’t break the buck.

I strongly encourage investors in money market funds to check with their brokers or financial planners to review the nature of the underlying assets in their money market funds. I would particularly look out for investments in any type of auction-rate securities.

In addition to this caution, I would also strongly encourage investors in municipal money market funds NOT to invest in funds which have investments in the newly designed municipal auction-rate security known as x-Tender or Windows.

Despite the rise in the equity markets and supposed hints of stability in the economy, this is no time to get complacent about your investments. The transition we are experiencing in the economy and the markets will present real opportunities, but also real risks.

On the topic of risks, it is of paramount importance that all investors get full information from your brokers and financial planners across all your exposures. Do not allow those managing your money to indicate ‘the market feels OK here’ and leave it at that. Why? Significant underlying fundamental risks remain in the market. I am reminded of two of them this morning as I read the following about insurance companies and money market funds:

1. Experts Call for Fed Involvement in Insurance Industry — but to Different Degrees; InvestmentNews, July 29, 2009

Members of Congress are being urged to create — at a minimum — a new regulatory body within the federal government to focus on the insurance industry. “There is some systemic risk in insurance requiring a regulator,” said Travis Plunkett, legislative director of the Washington-based Consumer Federation of America, who was part of a panel of experts testifying today at a Senate Banking Committee hearing on modernizing insurance regulation.

“In order to fully understand and control systemic risk in this very complex industry, the federal government should take over solvency and prudential regulation of insurance as well.

This shift in regulatory oversight of the insurance industry would be a massive undertaking. Recall that all insurance companies are currently regulated at the state level; however, state insurance reserves to protect policyholders against defaults are woefully deficient.

Some life insurers used the recent market upturn to raise more than $10 billion in combined capital. Hartford Financial Services Group and Lincoln National, which report after the market closes Wednesday, accepted Treasury Department money. The injections have scaled back doomsday scenarios, as well as liquidity concerns that made a few insurers short-selling favorites.

At Hartford and Lincoln, analysts are watching closely to see if the government bailouts may be tainting the insurers in consumers’ eyes.

While certain banks were forced to take TARP money, for Hartford and Lincoln taking TARP became a necessity. If I had exposure to these institutions, I’d be monitoring them very closely. I’d do the same with all my insurance exposures.

I’m among the last people standing who think that Paul Volcker is right about money-market mutual funds. They pose a systemic risk to the financial system and need a radical fix.

When a central banker of Volcker’s magnitude raises a concern of systemic risk, I am all ears. Virtually the entire money market industry is currently backstopped by Uncle Sam. How many of these money funds may ‘break the buck‘ without some form of assistance? Bryant asserts:

In most cases, money-fund sponsors have come to the rescue of their funds if any question arose about the $1 value of their shares. Peter Crane, president and founder of Crane Data LLC in Westboro, Massachusetts, says as many as one-third of the funds will have needed support by the time this global financial squeeze abates.

But you can’t be sure that sponsors will always be willing or able to bail out their shareholders, says Jack Winters of Hingham, Massachusetts, an expert who worked in the industry from 1976 to 2008 and commented on the SEC proposals.

If and when your money market fund “breaks the buck,” will you be there to collect the change?

I believe it is increasingly likely that money market funds will “break the buck.” The recent SEC statement put forth by SEC Chair Mary Schapiro, which I highlighted in writing “The Buck Is Beginning to Break”, addresses this topic.

In that post, I specifically referenced my concern for municipal money market funds given the recent launch of a municipal version of an Auction-Rate Security, designated as an x-Tender by Wall Street. I walked you through the processing and packaging of this mystery meat in writing, “The Wall Street ‘Sausage Making’ Process.”

The SEC proposed requiring retail money-market funds to have at least 5% of their assets in cash, U.S. Treasury Securities or securities that are accessible within one day and at least 15% in assets that can be converted to cash within a week. Institutional money-market funds would be required to have at least 10% of assets in instruments that could be converted into cash within one day and at least 30% in securities that could be converted within one week. The rules wouldn’t apply to tax-exempt, municipal money-market funds. (LD’s emphasis)

Why and how is it that newly designed rules for a $3.8 trillion sector of the market can exclude a sector encompassing municipal funds? My antennae went up immediately upon reading that. What is different about municipal money market funds that would exclude them from a set of rules designed to protect investors?

Why doesn’t the WSJ itself pursue this line of questioning in writing the article. How can the industry segregate municipal money market funds?

Municipal finance has been largely dependent on newly defined Build America Bonds which entail an obligation by Uncle Sam. Call me suspicious, but I wonder if the exclusion of municipal money market funds is due to the hoped for salvation of municipal finance via the municipal auction-rate security, x-Tender, otherwise known as Porky Pig here at Sense on Cents.

I will keep my nose to the ground in an attempt to sniff this out. Anybody who can help us determine the nature of this stench, please share. In the meantime, stay away from municipal money market funds.

Investors in money market funds are generally under the assumption that those funds would always maintain a $1.00 NAV (net asset value). Well, investors should lose that assumption and prepare themselves for funds beginning to ‘break the buck.’ Do not panic, but let’s review developments in this $3.8 trillion sector of the market.

When markets were seizing up last September upon the failure of Lehman Bros., the U.S. Treasury provided a temporary backstop of money market funds so they would not break the buck and cause a “run on the fund.” Here is the Treasury statement from last September: Treasury’s Temporary Guarantee for Money Market Funds.

What if another fund in an investor’s fund family breaks the buck before this program starts? Is the investor covered?

The program provides a guarantee on a fund-by-fund basis up to the amount of shares held as of the close of business on September 19, 2008. The performance of a different fund, even one in the same fund family of the investor’s fund, doesn’t affect the investor’s fund’s eligibility. Investors should contact their fund to determine if their fund participates in the program.

Well, investors should prepare themselves for this guarantee of money market funds to end and that certain funds will begin to ‘break the buck.’ One does not need to be a savant to see this development in a recent release from SEC chair, Mary Schapiro. Here is the full SEC Statement on this topic.

For those involved in the markets, very often the first rate one checks in the morning is Libor (London Interbank Offered Rate). For those not directly involved in the markets, perhaps tomorrow morning or Thursday you may start your day by asking your partner, “where’s Libor?” In all seriousness, the 1 month and 3 month Libor rates may very well be the most closely watched indicators of market health in the world.

As Libor is the rate at which banks can borrow from each other in the London market, the rate is an indication as to the availability of dollars and the confidence banks have in each other’s credit. Traditionally, Libor tracked the Federal Funds rate (the rate at which banks borrow from the Federal Reserve) very closely. However, on the heels of the failure of Lehman Bros. last September, the confidence banks and investors had in each other plummeted. The relationship between the Fed Funds rate and 3 month Libor blew out. The 3 month Libor rate went as high as 4.7% from just outside 1%. Recall that at that period there was concern about money market funds “breaking the buck” amongst a whole set of other issues. (more…)